How to liquidate a small business

Is liquidation the right exit strategy for your small business?

Unlike a sole trader, if you want to close a small limited company, it’s not simply a case of paying off any debts, informing HMRC and shutting up shop. A limited company is a financial and legal entity in its own right, and when you want to close it, it has to be done in a certain way. 

Liquidation is one of the most common ways to close a small business. Whether you want to retire, start something or close a business with unmanageable debts, liquidation is an efficient and orderly method that can reduce your tax bill and enable you to claim director redundancy pay. 

Here we explain how to liquidate a small business, what the different liquidation procedures involve and when it’s an appropriate exit strategy.

What does it mean to liquidate your business?

The most common way to exit a limited company is to sell it, but that’s not always an option. For example, your business could be in debt, there may be no one interested in buying it, or the business may not be able to continue without your specific experience or skill set. Whatever the reason, for many small business owners, liquidating the company’s assets represents the best or only feasible way to exit the business. 

Liquidation is the process of turning the business’s assets into cash by selling them on the open market. The money raised is distributed among the business’s owners or used to repay its creditors (the parties it owes money to). Examples of assets that are commonly sold on liquidation include:

• Tangible assets, such as buildings, vehicles, machinery, equipment and stock
• Intangible assets like patents, trademarks, copyrights, databases, customer lists and domain names 

You must appoint a licensed Insolvency Practitioner to liquidate the business on your behalf. They will take control of the company, wind down its affairs, value and sell its assets and strike it off the official register at Companies House. At that point, it will cease to exist as a legal entity.

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What are the different types of liquidation?

There are three main types of liquidation. The appropriate procedure for you will depend on your business’s circumstances.

• Members Voluntary Liquidation (MVL) - A Members’ Voluntary Liquidation is a controlled and tax-efficient way to distribute the value held in the business to its owners before closing is down. You can only use an MVL if your business is solvent, meaning it can pay all its debts. You must appoint an Insolvency Practitioner to liquidate the assets. They will repay any creditors before distributing the rest of the profits to the shareholders based on their shareholding percentage.
• Creditors’ Voluntary Liquidation (CVL) - If your business cannot pay its debts when they’re due, it is insolvent. You can voluntarily liquidate an insolvent company by initiating a Creditors’ Voluntary Liquidation. The proceeds from the sale of assets will be distributed among your creditors, and any remaining debts will be written off.
• Compulsory Liquidation - Compulsory Liquidation is another insolvent liquidation procedure, but it’s not voluntary. Instead, a creditor that has tried and failed to get your business to repay a debt petitions the court to wind up the company. If the court supports the petition, it will appoint an official receiver to liquidate the business and repay the creditors as far as possible, and any remaining debts will be written off.  

Liquidation vs. Company Dissolution

Liquidation is not the only way to close a limited company you can’t or don’t want to sell. Company Dissolution, also called Strike Off, can be a cost-effective way to close a small business as there’s no need to appoint and pay the fees of an Insolvency Practitioner. 

You can apply to dissolve your company online and manage the process yourself. If your business meets the eligibility criteria and there are no objections, the business will be struck from the Companies House register after around three months. 

The catch is that you cannot dissolve a solvent company. If your business has debts it cannot pay, you must close it via one of the insolvent liquidation procedures - namely Creditors’ Voluntary Liquidation or Compulsory Liquidation. 

Even if your company is solvent, if it has valuable assets then liquidating it via a Members’ Voluntary Liquidation (MVL) is likely to be more tax efficient than Strike Off. That’s because all the proceeds from an MVL are taxed as a capital gain rather than income. You may also be eligible for Business Asset Disposal Relief, which reduces the rate of Capital Gains Tax you pay. 

If you were to Strike Off a solvent business, only distributions up to £25,000 are subject to Capital Gains Tax, and you pay income tax on anything over that amount at a higher rate. You’re also not eligible for Business Asset Disposal Relief.

How long does it take to liquidate a small business?

There’s no fixed time frame for liquidation. However, it can be quite quick for small businesses with relatively few assets or creditors. It will usually take a few weeks to enter into voluntary liquidation once you have contacted an Insolvency Practitioner. From that point, a straightforward Members’ Voluntary Liquidation can take as little as three months.

A Creditors’ Voluntary Liquidation usually takes longer as the liquidator must formally request creditors submit claims and provide supporting documentation for the money they’re owed. The liquidator must also investigate the reasons for the company’s failure and the conduct of the company directors leading up to the insolvency. That means a simple CVL can take six months or more. 

Compulsory Liquidation is typically the slowest of the three procedures, as you must wait for a creditor to petition the court and the court to schedule and hold a winding up hearing. Only then can the liquidation process begin. Even for small businesses, Compulsory Liquidation can take up to a year.    

How much does it cost to liquidate a company?

You must appoint an Insolvency Practitioner to liquidate the business on your behalf, and their professional fees usually make up the lion’s share of the overall costs. Other liquidation costs include third-party expenses like advertising the liquidation, valuing the assets and any legal or accounting fees. You may also have to factor in the costs of redundancy payments for employees.

Liquidation costs vary depending on the complexity of the case, the number of assets and creditors, the type of assets, and the amount of work required. However, as a rough guide for a small, simple business, you could expect to pay £2,000 to £3,000 for a Members’ Voluntary Liquidation and £3,000 to £4,000 for a Creditors’ Voluntary Liquidation. 

However, these costs are usually covered by the sale of assets, so the company pays rather than you personally. If the business is insolvent, you may also be eligible for director redundancy pay. You can use that payment to cover the liquidation costs if the company does not have many assets. 

How do I initiate the liquidation process?   

If you think the time is right to close your business or you’re worried it’s insolvent, the first step is to contact an Insolvency Practitioner. They will discuss your options with you and explain the liquidation process in more detail. 

Once you have all the facts, you can call a shareholders’ meeting to pass a winding up resolution. The liquidation begins when the resolution to wind up is passed. At that point, the liquidator will take control of your business and administer the procedure.   

Need small business liquidation advice?

At UK Liquidators, we are the largest independent licensed Insolvency Practitioners in the UK. Please get in touch for a free, same-day consultation or to arrange a meeting at one of our 100+ local offices throughout the UK. We will assess your circumstances and advise you on your options. We can also help you liquidate your small business if it’s the most appropriate way forward.